If you can think of other answers that are both unique and legitimate, post them in the comments and I will add it to the post. By the way, I would not consider 1+1 = 5–4 as unique. It is legitimate, but not unique since I’d still put in in the arithmetic category.

Venture capitalists always talk to their portfolio companies about how important it is to define your customer, understand their needs, and create a compelling value proposition for them. Though, if you talk with enough VCs, we have a hard time defining the customer for our own business. I was having a recent discussion on this topic with some colleagues in the industry and no unified consensus emerged. It is always a debate between our limited partners (“LPs” – those who invest in VC funds) and entrepreneurs. We all know that we ultimately get “paid” by LPs. But, we also know we don’t survive if entrepreneurs don’t want to work with us. So, who is the venture capitalist’s customer?

To try and get some feedback, I decided to ask my twitter friends: Who is the VC’s customer? I specifically asked VCs to respond. Somewhat surprisingly, no VCs responded, but I got a slew of responses from entrepreneurs. They were quite aligned:

meetthestreet: “LPs…pension funds and endowments are clearly VC customers. In money management the people who give you money are your customers.”

CameronHerold: “unfortunately for entrepreneurs the Investors are the VCs customers. The entrepreneur is the VCs product.”

EdLoessi: “the VC’s customer are the people who gave them the money the tool is the company invested in and sometimes you break your tools!”

I’d say 85%+ of the respondents said the VC’s sole customer is the LP. Not a single responder said that the entrepreneur is the VC’s principal customer. So, in an unexpectedly round about way, I got my answer from entrepreneurs, not from VCs. If entrepreneurs are the VC’s customer, surely entrepreneurs would know that. Since they don’t know that – either VCs are doing a terrible job taking care of their customer (which is possible) or in fact the entrepreneur is not the end customer of the VC.

My personal belief is that the VC’s primary customer is the LP. There is a clear and constant relationship between VCs and our investors which is consistent with the traditional definition of a vendor/customer relationship – they pay us for providing a product/service to them. We have to provide a great product/service to our LPs and service them well as our customer or they can take their business elsewhere.

Then what are entrepreneurs to VCs? First of all, entrepreneurs should be no less important to VCs than LPs. Without LPs, VCs are out of business. Without entrepreneurs, VCs are out of business too. Entrepreneurs can take their capabilities elsewhere, same as LPs. So, while entrepreneurs and LPs are equal in importance, it is a different relationship. I do not have a vendor/customer relationship with the entrepreneurs I work with. In my mind, the entrepreneur is not the VC’s customer any more than the VC is the entrepreneur’s customer. Nor do I think describing entrepreneurs as the VC’s product or supplier is accurate. Neither of these lines of thinking fit for me as the right way to describe the relationship.

I think the best term to describe the relationship between VCs and entrepreneurs is partners. The official definition of partner is: “a person who shares or is associated with another in some common action or endeavor”. I view the entrepreneurs I work with as my partners. I think they view me as their partner as well. I am sure that any of my CEO’s will tell you the effort that I put in towards being a value-added partner to them. We partner together for the common end goal of building great companies and creating value for shareholders. So entrepreneurs are not customers, suppliers or products for VCs, they are partners. We work side-by-side as partners at the end of the day. I wouldn’t have it any other way.

For several months, Cortera has been working on the launch of the Cortera Credit Exchange where businesses can rate each other on how they pay their bills (my earlier blog post on why I’m so excited about it). Waking up this past Tuesday morning when the DEMO embargoes cleared – I did a news search on Cortera and there was Rafe Needleman’s CNET article entitled “Tiny Cortera Swings For Dun & Bradstreet”. Rafe’s article started with this ominous line, “I think I just found the dullest company at DEMOFall 09 to write about”. Ouch. But, the very next line points out how the boring blocking and tackling companies can find “huge success”. Phew. In a follow-up article, Rafe reaffirmed his dullness claim, but also called Cortera the “most disruptive business” at DEMO. Yes!

While every other company wanted to be on the “coolest company” lists at DEMO, Jim Swift, Cortera’s CEO, decided to embrace their newfound fame as the dullest company at Demo. Dull and proud of it! Based on the great reception Cortera has gotten, it seems that in a sea of oh so cool, dull is in.

Days like today are one of the reasons I love being in the venture business. I love investing in companies with great people, doing very innovative things that can completely disrupt large, stodgy industries. I love the idea of bringing millions of customers and users real value that they couldn’t imagine before. I love any innovative service that creates transparency, levels the playing field, and lets the little guy win. It’s all about putting the slingshot in David’s hand – and going after Goliath. Today, Cortera is doing just that with their launch of the Cortera Credit Exchange at DEMOfall 2009. Congratulations to the team at Cortera for their amazing effort.

What does Cortera do? The most impactful and disruptive innovations are often the simplest. This is no different. At its most basic level, Cortera’s service enables any business to rate any other business on how they pay their bills. We think of it as Yelp for business credit. In today’s launch, there are already over a million ratings on businesses like yours and mine. There’s a lot more data on top of the ratings on virtually every company in the United States. Why is this such a big innovation? It puts power back in the hands of small businesses around this country in a couple of really critical ways:

Firstly, it enables the voice of the small business to be heard in the business credit world. Traditionally, commercial credit ratings are driven by payment data contributed from a few thousand large companies. While Cortera has included that data as well, there are tens of millions of smaller companies whose payment experiences have been left out until now. On Cortera, the payment rating of a small business matters just as much as the payment rating of a large company. Any business can go online at Cortera, right now, and enter a payment experience they are having with one of their customers. The playing field has been leveled.

Secondly, by leveraging the Internet for user generated ratings, Cortera can now offer commercial credit data for prices unheard of in the business credit industry. Basic credit information and user ratings are now available for free. Free is a term that has rarely been uttered in this industry. And while traditional business credit reports from incumbent vendors can cost $50–$150 per report, you can now subscribe to Cortera for near-unlimited data access for most companies in the United States for as low as $29–$49/month. This is a game-changing innovation to price structure of the business credit industry.

Finally, Cortera enables small businesses to build a credit rating based purely on the ratings of its partners and vendors on Cortera. Lots of small businesses have trouble building credit ratings because the payment data for traditional ratings come from big companies. What if your business principally works with small companies? The old model can leave a creditworthy small business on an island. Now any business can take control of their credit reputation, and build a credit rating on Cortera directly through the feedback of the businesses it works with. We hope to enhance the credit reputation of millions of small businesses.

As we all know, it’s credit that makes the economy run. Every accounts receivable (AR) is a form of credit one business has extended to another. Every accounts payable (AP) is a form of credit received by one business from another. Nearly every business on the planet has both AP and AR on their balance sheet. Business transactions big and small are done on credit every day. But, how does a business know if the party they are transacting with is credit worthy? Cortera now makes it drop dead simple and cheap. Type in the company name on Cortera, click on the right company, and you’re there.

The world is changing. You don’t go to a movie without looking at the ratings online. You don’t go to a restaurant without checking ratings online. You don’t book a hotel or plan a vacation without pouring over ratings online. But, you’d give someone 30 day terms on a $50,000 order without checking credit ratings online? Not any more, not with Cortera. Congratulations to the entire team at Cortera for introducing a truly disruptive service to an industry in dire need of change.

(Disclosure: Cortera is a Fidelity Ventures portfolio company, and I sit on the Board of Directors.)

These days, you can get great office space in the heart of Boston’s financial district for $40–$60/square foot (maybe cheaper). If you asked most people where the most expensive commercial real estate is – they might say the West End in London, Central Business District in Hong Kong or Mumbai, or possibly overlooking Central Park in Manhattan. Rents in these areas can be $200–$400 per square foot. If you asked people where the most expensive retail space is – they might say Champs-Elysees in Paris, Causeway Bay in Hong Kong or Fifth Avenue in New York City. Rents on those streets can be $1,000–$1,500 per square foot. Even those exorbitant rents don’t come close to what *may* very well be the most expensive commercial rental space in the world at $4,000 per square foot. And this space is not even for people, it’s for computers.

The most expensive commercial real estate in the world may just be an anonymous data center in Chicago which holds the computers powering the big securities exchanges like the Chicago Board Options Exchange (CBOE). Who’s paying for this real estate? Not the exchanges themselves. But the new power brokers on Wall Street – high frequency traders. These traders make a living on computer generated algorithms that fire thousands of trades per millisecond capitalizing on arbitrage opportunities as a security plods its way from being priced at $25.01 to $25.02. That price change takes time, and in that time, high frequency traders are making a living – and some say a killing.

Part of the secret sauce of high frequency traders is leveraging the latest and greatest technologies to execute these trades with the utmost intelligence and speed. But, no matter how intelligent that trade is – it still needs to travel from one computer to another to be executed. That trade needs to be communicated. And in the game of electronic communication, nothing can quite take the place of pure proximity between origin server and destination server. When billions are made on millisecond-level trade throughput, having your server right next to the server that executes your trade is worth a lot more than $4,000 per square foot, it’s priceless.

Scott Kirsner, a Boston Globe writer and freelancer, wrote a provocative blog post a few weeks ago entitled “Why Waltham Doesn’t Matter”. Scott’s basic claim is that Waltham VC’s “don’t matter” as they are being displaced by the new aggressive and open culture of VCs emerging in Boston and Cambridge. While I disagreed with the title of his post and the implication, Scott’s point on cultural differences has real merit. Hence, I thought I’d put it to the test on one dimension after publishing the revised Global VC Blog Directory this past Monday.

Here’s the list of the greater Boston VC bloggers ranked by Google Reader subscribers and whether they’re from Boston/Cambridge or Waltham (# of subs):

(To subscribe to all of these blogs in bulk – click here. * = inactive)

What’s interesting to note is that 89% or 16 of the 18 VC bloggers in the greater Boston area come from firms that are based in Boston/Cambridge. Only 2 of the 18 are from firms in Waltham. This is in contrast to a pretty fair presumption that a (strong?) majority of VC firms are located in Waltham or Rt 128. It’s also worth noting that the Boston/Cambridge VC bloggers represent both newer firms (Spark, Flybridge, Openview, Cue Ball) and firms that have been around for decades (Sigma, Venrock, Fidelity, etc.). So, it’s not just a new firm dynamic.

Let’s be clear, though, that blogging is one very narrow dimension. And it is not a dimension that at this juncture can be tied in any definitive way to ultimate success or returns. So, I’m not sure at the end of the day that who blogs and who doesn’t really matters in any material way. But, it is reflective of a cultural difference today that is stark enough that it seems worth noting.

Thanks to TechCrunch’s support of the VC Blog Directory. Erick Schonfeld highlighted the Sept 2009 update yesterday and Leena Rao wrote about the original May 2009 version. I thought Erick’s post yesterday was particularly interesting as it highlighted the movers and shakers among VC bloggers – by the change of their ranking in the directory over the last 3+ months.

When I looked at both versions of the directory side-by-side, the thing that stands out to me the most is the growth of Fred Wilson’s blog (Fred is with Union Square Ventures). As Erick points out, Fred Wilson was ranked #2 in May, and still remains #2 in Sept. But, that belies an amazing trend underneath the surface.

Here’s the data for the entire VC blog directory (effectively a proxy for the entire VC industry):

The growth for his blog has been 10,060 subscribers or 85.1% growth in 3+ months.

But here’s the implication of when you put these two stats together: Fred Wilson’s blog subscriber growth represented 25% of the blog subscriber growth of the entire VC industry (=10,060/40,030).

I would call that clear competitive separation. As other bloggers grow their subscribers by 100, 500, or even 1,000 subscribers over the same time period, Fred grew his blog 10x, 50x, even 100x those numbers. And, I’m sure it doesn’t take Fred any longer to write a blog post for 10,000 subscribers as it does 20,000 subscribers – so it’s the best kind of competitive seperation – it has embedded leverage. Since I’m a runner, the best track analogy I can think of is imagine running around the track once, and having the other guy lap you 20 times in the process. Arguably, that’s what Fred is doing – lapping the VC industry many times over through his blog.

Now, you could argue whether or not Google Reader subscribers the best statistic (as Rob Go at Spark Capital has asked me). And I think there’s a reasonable question there. Though I would say it’s still a fair statistic of relative reach. And, you could even more strongly argue that blogging isn’t a subscriber competition – which I would certainly agree with. As Jeff Bussgang at Flybridge Capital once told me, the reason to blog is because you like writing and it’s fun. I couldn’t agree more.

Nonetheless, you have to give kudos where kudos is due. I admire great execution in any context. So, kudos to Fred Wilson. Clearly, he is doing something right.